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Obamacare Will Stifle Healthcare Innovation, Making It A Real Pain

Cook scuttled plans for five additional plants across the Midwest. It expects the device tax could cost $30 million annually, roughly equivalent to constructing its new Canton, IL factory. Says the company, “that’s one less facility per year that we’re going to be able to use because of the tax.” As escalating costs push returns below acceptable hurdles, companies otherwise hesitant to employ cheap foreign labor cannot justify domestic expansion.

It’s painful when jobs change through creative destruction, but market forces ultimately reorient bringing something better. When American businesses fall to more efficient foreign competitors, workers temporarily suffer, but domestic companies refocus where they excel. Yet, these policies trip American device makers for political reasons, rendering them less efficient.

The ill effects go beyond layoffs. Without capital, new jobs and better products never develop. To see how the device tax stymies private investment, consider Hill-Rom (“HRC”). Over the four most recent quarters, the hospital bed producer generated revenues of $1,633 million, earning net income of $145.1 million. Hill-Rom’s return on equity (“ROE”) totaled 18.6 percent.

At 2.3 percent of gross revenue, the device tax knocks net income down to $108 million slashing ROE to 13.7 percent. Earnings plummeted by a quarter from what is merely one of many new burdens. Other levies and the cascading bureaucracy under Obamacare will repel capital as returns dwindle.

In an industry showing significant economies of scale, those hit hardest will be small, entrepreneurial firms turning thinner margins. America presently leads the world in medical device technology, but this tax will stifle expansion and life-enhancing advances. Smaller firms spearhead innovation.

Even Elizabeth Warren concedes, “When Congress taxes the sale of a specific product through an excise tax, as the Affordable Care Act does with medical devices, it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential.” Warren continued, “It also pushes companies of all sizes to cut back on research and development for life-saving products.”

The House of Representatives, in bi-partisan fashion, repealed the device tax. Senate Democrats have obstructed them and President Obama promises to veto. It’s no wonder given Obama’s increasingly hostile regulatory regime, 55 percent of small business owners say they would not invest the time, effort and savings necessary to launch their companies today.

As Washington’s increasing oversight causes healthcare investment to shrivel, the outcry will prompt politicians to commandeer capital as they have in energy. Ronald Reagan quipped, “The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” Here come the medical Solyndras.

The regulatory hammer pounds the market causing unacceptable outcomes. Washington all too frequently responds not by eliminating the harmful legislation, but pounds markets anew from the opposite side. The subsidies sure to follow will reward cronies and underwrite products per political expediency, even what the market disdains. No longer will customers steer medical investment through the lure of profit.

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